Climate change: Why the ECB refuses to create a lower interest rate for green investments

On one hand, Europe has experienced a series of record-breaking heatwaves, further evidence of climate change. Economically, it also suffered from its dependence on oil, which saw prices soar after the US and Israel attacked Iran at the end of February. On the other hand, in an effort to contain this surge in inflation, the European Central Bank (ECB) raised its interest rate in June from 2% to 2.25%. At its upcoming meeting on Thursday, July 23, it is expected to leave the rate unchanged, but another increase in September remains on the table.

Between the two lies a deep contradiction. The green transition, necessary to limit heatwaves and reduce reliance on oil, requires significant investment: renewable energy, changes to industrial processes, transformation of agriculture and more. Yet, raising interest rates makes these investments more expensive and therefore slows down the necessary work.

A study published in March demonstrated this connection. Economists Alexandra Serebriakova, Friedemann Polzin and Mark Sanders from Maastricht and Utrecht universities in the Netherlands showed that between 2001 and 2024, a 0.25-point increase in interest rates reduced the average capacity of onshore wind power installed by 3.2%, and solar by 5.3%. Conversely, fossil fuels, along with hydropower and nuclear energy, were unaffected.

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